Failure to foreclose holds back real estate rebound

Policies to protect struggling homeowners from foreclosure in the District of Columbia, Maryland and other jurisdictions have offered "fool's gold," in the words of one top analyst, and they are holding back a real estate rebound, even as the U.S. housing market begins to roar, or at least growl, across the country.

Lawmakers who developed the policies at the height of the housing market crisis have made little or no effort to change course.

Daren Blomquist, an analyst at RealtyTrac, which tracks foreclosure trends, said markets such as the District, where foreclosures have slowed to a trickle — are "rewarding bad behavior" by creating a backlog of troubled properties that drag down the overall market. The best way to fix the impending foreclosure crisis, he said, is to speed up the process and flush excess foreclosures through the system.

"We're far past the tipping point of how long homeowners should be given to avoid foreclosure," he said. "By continuing to give homeowners more time, that is just delaying the housing market recovery."

Foreclosure numbers offer mixed signals for the market. As the economy sours and housing values sag, the rising number of foreclosures is a key indicator that the market is hurting. But when, as now, the market is trying to mend and clear off an overhang of troubled properties, scaring off buyers and sellers alike, strong foreclosure numbers can paradoxically be a signal that the market is healing.

RealtyTrac this week found that 1.5 million U.S. houses were either in foreclosure or owned by banks in the first quarter of the year, up 9 percent from the first quarter of 2012 but down 32 percent from the 2.2 million at the peak of the housing crisis in December 2010.

"Delinquent loans that fell into a deep sleep after the robo-signing controversy in late 2010 are gradually coming out of hibernation following the finalization of the national mortgage settlement" in the spring of 2012, Mr. Blomquist said.

Stricter laws that allowed for faster foreclosures have helped clear the backlog of foreclosed housing properties that slowed down the nation's recovery.

The number of actual foreclosures on U.S. home loans fell sharply again in February, down 29 percent from January and now at the lowest level since 2007.

But in the District, a mere four foreclosures were recorded in February, a decline of 84 percent from the same period in 2012. The decrease in large part is a result of the Saving D.C. Homes from Foreclosure Act that took effect in November 2010. That year, according to city data, there were 1,349 foreclosures across the city, followed by 566 in 2011 and 89 in 2012.

D.C. Council member Vincent B. Orange, at-large Democrat who oversees housing laws, makes no apologies for the slowdown.

"Even one foreclosure is one too many," Mr. Orange said. "I'm pro-homeownership. I'm taking the position to work with folks. At least this way they have a fighting chance to keep their homes."

That may be of some comfort to struggling homeowners, but real estate analysts warn that such policies are keeping foreclosure rates "artificially low."

The Saving D.C. Homes from Foreclosure Act has been blamed for lengthening the foreclosure process. It takes more than 1,000 days, or about three years, for a lender to complete the foreclosure of a home in the District. The national average is 414 days.

For a glimpse of the problems that a slow foreclosure process can cause, look no further than Maryland.

In Maryland, it takes 531 days to complete a foreclosure, nearly 30 percent longer than the national average. That didn't solve the state's foreclosure problem — it just hid it until the numbers began to boil over and hurt the housing market.

Maryland now has one of the top 10 foreclosure rates in the country. In February, foreclosure activity in the state jumped 83 percent in a single month — the eighth consecutive monthly increase.

One in every 720 homes in Maryland is in the foreclosure process, above the national average of 1 in 849 homes.

Across the Potomac in Virginia, by contrast, the average time to foreclose is 146 days, second only to Delaware among the states. Virginia now has flushed out its foreclosure problem and is rebuilding the housing market.

Jumping on the fast track

While some states ride the brakes, others are pumping the gas. Illinois, New Jersey and even Maryland have written laws designed to speed up the process for dealing with abandoned properties.

Maryland lawmakers attached fast-track legislation for vacant properties to the same mediation bill that was enacted last year, though officials say it is too soon to measure the effectiveness.

In Illinois, one of the states that was hit worst by the foreclosure crisis, Gov. Pat Quinn, a Democrat, signed legislation last month to reduce the foreclosure process on abandoned properties to as little as 90 days.

In cases where owners have given up and left their homes, the law would allow lenders to seek speedy foreclosures.

State Sen. Jacqueline Collins, a Democrat from Chicago, pushed the bill.

"Some of my communities have been the hardest hit by abandoned properties and foreclosures," she said. "People are not going to move into a community where they see two or three or four abandoned properties."

Samantha Tuttle, director of policy and advocacy at Heartland Alliance, a group that fights poverty, helped Ms. Collins shape the bill. "Here's a property where nobody's living in it; it is not anybody's home any longer," she said, "so moving those properties through the system more quickly makes sense."

New Jersey is taking a similar approach. Gov. Chris Christie, a Republican, signed the state's fast-track legislation into law Dec. 6. Under the law, abandoned properties would be considered houses with overgrown grass, an accumulation of newspapers or mail on the ground and junk and litter on the yard, among other things. It could take as little as a few months to foreclose on such properties.

"We're trying to get foreclosed homes back on the market and occupied," said state Sen. Raymond Lesniak, the Democrat from Union County who pushed the legislation. "They're a drag on the economy and an invitation to crime. It really depresses the entire housing market."

In Florida, lawmakers are close to wrapping up a fast-track foreclosure bill. State Rep. Kathleen Passidomo, a Naples Republican, has been pushing the law to combat her state's foreclosure problem.

"We have neighborhoods that are so bad you could have half the homes on a street in foreclosure," she said. "There are some people I know who stopped paying their mortgages three and four years ago and they're still living in their homes."

Even in a state hit particularly hard by the housing crisis, Florida's foreclosure bill is facing opposition from real estate lawyers and homeowner advocates who say it is too harsh and strips homeowners of their rights.

Roy Oppenheim, a Fort Lauderdale real estate lawyer, in a recent blog post compared the Passidomo bill to "Liquid-Plumr, pushing foreclosures through the drain and turning the legal system on its head."

"Even criminals are considered innocent until proven guilty and given their day in court before they are thrown into jail. Shouldn't homeowners be given their day in court before they are thrown out of their homes?" he wrote.

In the District, Mr. Orange said he may consider fast-track legislation this year, acknowledging that the city's foreclosure law may need adjustments.

"It's my understanding that the bill has been working well, but it may need to be tweaked a little bit," Mr. Orange said.

One change, he said, could be fast-track legislation for abandoned properties, though he has not presented a proposal to the board.

"Abandoned properties are doing no one any good," Mr. Orange said. "I would think we should get them back on the market as soon as possible."